Why the digitalization of the economy benefits the richest

Tell me what you eat, I’ll tell you if you’re rich. One clue: the more digital products you buy, the higher your revenue and the more profits, because digitalization has brought down the prices of the goods and services you love. This is shown by recent research by Kai Arvai, an economist at the Banque de France, and Katja Mann, of the Copenhagen Business School.

The impact of digital technology on inequalities is already relatively well documented. Over the last ten years, most studies have focused on the consequences of robotization on employment and, by extension, on the income of low-skilled workers.

New information and communication technologies have thus favored the replacement of low-skilled jobs by repetitive tasks with highly skilled jobs. How? Digital technologies have reduced production costs and improved the efficiency of the companies that have used them, encouraging other companies to start and invest more in digitizing their business. As a result, the skills of highly skilled workers began to be in high demand, which increased their wages.

The clumsy tinted glasses

“Simply put, if a company uses more digital capital in its production process, such as a computer or software, it will also have to hire a highly skilled employee who can work with this new form of capital.”, summarize the authors. And add: “Some tasks can be performed more efficiently by a computer controlled by a highly skilled employee than by an unskilled worker. »

In short, some see their pay rise when others lose their jobs. Obviously, it’s a little more complicated than that, digitization also increases the productivity of the economy. What can make up for the (small?) Loss of jobs. But the economic literature concludes that there is a negative effect on low-skilled workers. Ultimately, this leads to an increase in income inequality.

The richer a home is, the higher the intensity of digital technology in its consumer basket. It earns in both aspects: higher income and cheaper consumer goods

The study of Kai Arvai and Katja Mann confirms this well-known mechanic. The approach of the two economists is complementary to the work already published but goes further, illuminating this issue from a new angle. The authors do not stop at revenue, but take into account the effects of digitization on consumption. Because digital technologies have lowered the price of certain consumer goods, which a priori improves the purchasing power of those who consume these products with relative frequency. However, the richer a home is, the higher the intensity of digital technologies in its consumer basket. Therefore, it gains in both aspects: higher income and cheaper consumer goods.

To arrive at this result, the authors began by measuring the digital content of all consumer goods and services in the United States between 1960 and 2017. Lesson One: The stock of digital capital used in the production process in the United States. it has exploded more than 700% since 1995, when non-digital capital has only grown by 300%.

Increasing inequalities

Both economists also took into account the use of digitally intensive intermediate goods companies, even if they themselves do not directly use digital capital in their production. Some of the digitally intensive sectors include the financial, insurance, electronics and computer industries. On the other hand, agriculture, plastics and textiles have not taken the digital turn especially.

Once this database was consolidated, they calculated the share of digital technologies in consumer baskets, based on the level of consumer income, still in the United States. As a result, the poorest 20% consume 15% of digital intensive products, compared to the richest 50%, two percentage points more. Two points that can make a big difference in the scale of a consumer’s life.

This gap is explained by the fact that the wealthiest spend a larger part of their spending on education, finance and insurance; while the poorest will spend more of their income on clothes or food. Another interesting lesson: the proportion of digital products in the consumer basket has increased for everyone over the last twenty years, but much more strongly for wealthy households. As a result, inequalities in the consumption of digital products have increased.

It remains to estimate the “relative price effect”. “The fall in the relative prices of digital capital has led to a widespread use. Some sectors have benefited from this trend, so the relative price of their products has fallen “, the authors note, support graph: prices of goods in the low-intensity digital sector rise in line with the average prices of non-digital capital inputs (green and white curves). In contrast, the relative price of digital capital fell sharply, leading to a significantly smaller rise in the prices of goods in the digital intensive sectors (red and orange curves).

Therefore, the price effect of the digitalization of the economy has benefited the rich more. But to what extent? The authors took out the calculator and came to this conclusion, which they present as “approximation” : The increase in prices of the richest 20% represents approximately 25% of its 1996 income, while for the poorest 20% it represents more than 50% of its income. Inequality in terms of consumption would have increased, therefore, by 18% since the 1960s. And 22.5% of this increase in inequality is explained by the fall in relative prices. The rest is related to the effects of digitization on the income inequalities described above.

More income to consume less and less expensive goods on the one hand. Resources that are stagnating, even dwindling, to buy products whose cost is skyrocketing. This sheds new light on the growing gap between social categories on the other side of the Atlantic. It remains to be seen whether the same observation can be made on this side of the ocean.

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